Last week, Deutsche Bank hosted its 13th annual "Global Financial Services Conference," which featured a discussion with BlackRock's Larry Fink. The CEO talked about rate hikes, capital markets, and money market funds, among other things. Fink comments, "More fear means more savings in the short run." Asked about the growth of money markets, Fink says, "So I would say two things: as more and more money moves to the capital markets, whether in the short and long end, first of all, the net positive is -- and I think the Federal Reserve wrote a piece on this recently -- it actually is more liability backed. When you think about private credit for a second, I mean, we're liability matching everything. We're taking less duration mismatch, and, or more importantly, we don't have leverage, like banks." (Note: Register ASAP for our Money Fund Symposium, which takes place June 21-23, 2023 in Atlanta, Ga. See you in 2 weeks!)
He continues, "But that's the negative side [of banks] as more activity goes to the capital markets. The problem is: capital markets cannot leverage ... like the banking system. The banking system's beauty is the ability to leverage 8-to-1, 9-to-1 depending on its capital ratios. So the banking system does provide that economic stimulus that the capital markets can't provide. That's why we have to have a strong banking system at the same time, and really strong capital markets, and they have to play off each other."
Fink tells the DB event, "Related to money markets, most of the money went into government funds, almost 95% went into government funds.... The big problem we had over that SVB weekend was, 'Should every corporation who had excess cash sitting in a bank, should they be sweeping it into the holding company every night?' By the way, some companies are now doing that. They're sweeping it in ... whether they're using the money market funds of a bank or they're outsourcing a lot more of that."
He states, "That's always a problem when you have fearful [investors] frightened of your payrolls being met and your cash being frozen.... It leads to a lot of corporate treasurers asking themselves, 'Do I want to have that much exposure even in my, short-term liquidity pool to the bank for my payrolls?' You know, it was an existential problem."
Fink explains, "Let's be clear ... that one day problem raised a lot of questions with a lot of corporate treasurers. What should I do with my excess liquidity and how should I play that out?' That's why we saw this surge of money. It's going to take time and all that. But do I see any embedded risk that money went into a lot of government funds? Not necessarily."
Shifting to MMF risks, he says, "I'm not witnessing [among] competitive money market funds vast credit arbitrage. You think about in '07 and '08, you had Reserve Fund -- they were able to give you three extra basis points of return, and people ran there. Obviously, that was in the form of owning a lot of Lehman [Brothers] paper, and it blew up. You don't have that credit arbitrage."
Fink adds, "The range between the top ten money market providers, maybe it's a basis point, and it's generally based on where they are on the yield curve. Do they have a 28-day average [maturity], a 32-day average? That's shaping it differently, or you're keeping it all the shorter in 7 to 10 day.... We're going to see a big shift ... when the debt ceiling is all passed and the Treasury is issuing a lot of short-term bills. You're going to see a lot of movement in the money market funds. And ... let's be clear, money market funds are paying higher than most bank deposits and that's only going to be enhanced with a surge of bill issuance in the next few weeks."
Mutual fund news source ignites references Fink's comments in its piece, "'Truckload' of New Treasurys to Prompt Money Fund Flows." They tell us, "BlackRock Chief Executive Larry Fink expects assets to flow into money market funds once a debt-ceiling deal is passed. The House of Representatives passed a bill on Wednesday night to suspend the country's debt ceiling -- which currently stands at $31.4 trillion – through Jan. 1, 2025, by a vote of 314-117. The Senate passed the bill on Thursday with a 63-36 vote, and the measure now goes to the president for his signature [he signed Friday]. The legislation passed just days before June 5, the date that Treasury Secretary Janet Yellen indicated that the government could run out of money to pay its bills."
The piece says, "Fink expects the Treasury Department to issue more short-term bills once the debt ceiling is raised, he said Wednesday at Deutsche Bank's annual global financial services conference. 'You're going to see a lot of movement in the money market funds,' he said. '[L]et's be clear, money market funds are paying higher than most bank deposits. And that's only going to be enhanced with this surge in bill issuance in the next few weeks.' The funds in the Crane 100 Money Fund Index had an average seven-day yield of 4.90% during the week ended May 31, according to Crane Data."
The ignites article continues, "It's clear that 'truckloads' of Treasury bills will be issued, said Peter Crane, chief executive of Crane Data. 'With money market funds, supply had been shrinking and money funds had been steering clear of them because of the debt ceiling, so that certainly will reverse,' he said. 'The supply to money market funds will be welcomed, but that won't drive money fund assets on a trip to the moon.' Still, he said, money market fund assets hit a record high this week and will continue to climb as long as interest rates stay around 5%. Money market fund assets increased by $31.7 billion during the week ended May 31, reaching $5.42 trillion, according to data from the Investment Company Institute. Assets in government funds increased by $29.6 billion, to $4.51 trillion, during the period."
Finally, it adds, "The debt-ceiling arrangement is a 'big positive where you have both supply and demand increasing at the same time,' said Deborah Cunningham, executive VP and CIO for global liquidity markets at Federated Hermes. 'That's been the opposite of what we've had so far this year, where you had the demand increasing but not the supply,' she said. 'In fact, it was going quite the opposite, in the negative direction.' Overall, money market funds are poised to continue gathering assets, she added. 'Typically speaking, assets come into money market funds when rates have kind of plateaued or actually start to decrease,' Cunningham said. But over the last year and a half, retail investors have been piling money into the products, she added. Retail money funds added $8 billion in assets during the week ended May 31, according to ICI data, putting their total size at $1.33 trillion."
